I read this quote on another thread, and I am sure @EmeraldEyes won’t mind me quoting it here as the context here has nothing to do with that thread.
I think this is an incredibly important insight that all traders should think about.
If we were to always enter trades on a random basis then we could expect, over time, to get the direction right on approx 50% of our entries…and yet we find that 80-95% of traders lose money - consistently, year after year, after year, after year. Just look at the published losing percentage data required from regulated brokers. It hasn’t significantly changed at all ever since the regulations were introduced.
So what does this tell us? Well, let’s add another dimension to this. How often do your trades immediately go negative after entry without ever showing any kind of profit at all? Very few, I would guess.
So there is an important principle here. It is not the entry that causes the losses, it is the exit. In trading, the 50/50 right/wrong of random entries is only part of the equation. The real issue is whenever we are right (or wrong) at which point do we act on it? We need to ask ourselves, “how can I be right 50% of the time and still lose money!”
To answer this, we need to move away from the individual trade and look at the overall picture.
If we consider losses as the equivalent of overhead costs in any other business then the answer is clear: If your overheads consistently exceed your gross income from sales then eventually then you are bankrupt. It doesn’t matter how good you are at selecting the right products and the right quantities. If your overheads are too high with respect to your prices then you are unprofitable.
In trading, this is risk/money management. We need to do our accounting just as much as any other business. It is no good being proud of a 70-80% win rate if the losing trades wipe them out completely.
The bottom line? (we have talked about this before) You have not made a penny when you enter your trade. It is only your exit that defines your result. Exit strategy is where it really counts. E.g. if you miss a 50 pip target by a couple of pips and get stopped out instead for 30 pips, you account status actually has nearly 80 pips difference between the two scenarios of a profit or a loss on this trade.
How many of us can truly say that we spend more time on defining the accuracy of our targets and stoploss levels than on our entries -(and how many of those that do spend time on this area are still losing overall?)
Sunday thoughts…time to walk the dog.